IPOs and Brokerage Basics
When a company first wants to raise money in the market it will go to an investment bank and employ the investment bank to organize an initial public offering, or IPO. IPOs are usually the first attempt by a successful privately held company to raise cash for expansion by selling shares of itself to institutional investors and the public.
A valuation of the company is made, and the number of pieces of the company will be offered as well as an initial offering price. After much number crunching and legal work, the investment bank will go on a “road show” to promote and test the waters of public interest in the company. Sometimes the investment bank will take presale orders for blocks of shares for its best customers, usually institutional investors and hedge funds.
When the shares are first offered to the public, the company is in the process of going public. This going public is the dream of many business owners across the globe, as the cash that can be raised by such an IPO can be dramatic, and of course, a company's original owners will retain a certain number of shares for themselves. If they are not already millionaires, many business owners become millionaires overnight with the introduction of an IPO.
Don't bet on getting into any Initial Public Offering at the beginning. You can rest assured that the investment banks keep the best IPOs for their best clients. Any IPO that would be available to a normal retail customer would most likely not be worth getting into in the first place.
In order to buy a security you would need to have an account with a brokerage firm. There are two types of brokerage firms: the full-service firm and the discount firm. Opening an account with a full-service firm will give you access to a licensed representative who is trained in securities selection and the setting up of trades. She can offer you advice as to how the economy affects your trading as well as steer you into trades that offer the best profit potential. Most full-service firms allow you to trade almost all classes of securities from equities to futures to foreign exchange, and can also offer competitive interest rates on the unused cash portion of your portfolio.
Another advantage to full-service firms is the access to proprietary research reports on every asset class imaginable, some even going as far as to offer entry and exit points for profitable trading. Access to the long-term economic reports that are issued by the broker can also be a key element in successful day trading.
The second type of brokerage firm is the discount firm. Discount firms offer the same back office, order entry, and market access as a full-service firm. The only difference is that you will not have a representative to speak with, and most likely the discount firm will not offer its own research, but will rely on outside sources for this critical information instead.